Cartoon of the Day: Running Of The Bears

The BS Filter: Hedgeye's Take On Today's Financial News

Takeaway:"The stock market is the story of cycles and of the human behaviour that is responsible for overreactions in both directions." -Seth Klarman

Below is a collection of interesting links and insights from today's news with analysis filtered through our macro lens. This installment discusses why investors are wrong to be against long bonds, stalling M&A, UK 2-year bond goes negative, President Obama's obvious statement about global growth, big bank euphoria and despair, and why a few statement from European Commission President Jean-Claude Juncker is emblematic of everything that's wrong with the E.U.

A surefire way to lose moneY

"Treasuries are heading for their biggest back-to-back quarterly advance in more than four years," Bloomberg reported. Good so far. The story cites the Bloomberg U.S. Treasury Bond Index which has returned 5.5% since the end of 2015. But here's where Bloomberg journalists Wes Goodman and Anchalee Worrachate go off the rails: "Economists say the gains won’t continue into 2017." These so-called "economists" say simply "Treasury prices are too high."

Taking the Hatchet to M&A

According to Reuters, "The value of announced mergers and acquisitions (M&A) worldwide dropped by a third in the second quarter of 2016, as a wave of transactions were abandoned in the wake of concerns over regulatory and tax risks or national security."

Our Take: M&A activity always peaks at the end of the cycle as companies try to buy growth. Take a look at the chart below.

UK Bonds Go Negative

Wall Street Journal: "A two-year British government bond yield fell into negative territory for the first time ever in late European trading, after Bank of England governor Mark Carney’s announced that the central bank would likely have to stimulate the British economy in the aftermath of the country’s vote to exit the European Union. A bond maturing in March 2018 registered a yield of minus 0.04% shortly after European markets closed, according to Tradeweb."

Our Take: As global growth slows, bond yields around the world are coming down. That's why we're long the Long Bond (TLT).

Thanks Obama

"President Obama said he expects the global economy 'in the short run, will hold steady.' But it won't necessarily stay that way," CNN Money reports. "'I think there are some general longer-term concerns about global growth if in fact Brexit goes through and that freezes the possibilities of investment in Great Britain, or in Europe as a whole,' Obama said Wednesday at a summit in Canada."

Our Take: Brexit is merely a symptom of global #GrowthSlowing which we've been warning about for well over a year now.

Big Bank Buyback Euphoria

Phew. All 33 banks passed the Fed's stress test and, according to regulators, would not need more capital in the event of a severely adverse scenario. As such a slew of big banks announced buybacks and dividends after passing the test, sending Financials stocks higher.

Our Take: Buybacks are a nice mirage for banking executives, who get paid on this artificial growth in earnings per share, but, with interest rates so persistently low, bank stocks should get continually pummeled as net interest margin is squeezed. We're sticking with our short Financials (XLF) call.

... Big Bank Despair

Deutsche Bank was labelled the "most important net contributor to systemic risks in global banking system," by the IMF. Shares are getting punished today. Italian banks took a dip too as German Chancellor Angela Merkel shut down bailout hopes.

Juncker Is Everything That's Wrong With The E.U.

European Commission President Jean-Claude Juncker made headlines this week when he taunted British MEP Nigel Farage in the European Parliament saying, "Why are you here?" This is the same guy who once said that E.U. compromises and deals needed to be hidden from public scrutiny. "When it becomes serious, you have to lie," he said.

Other detestable statements from Juncker, via a 2014 The Telegraph article, include:

In May 2011, he told a meeting of the federalist European Movement that he often “had to lie” and that eurozone monetary policy should be discussed in “secret, dark debates”.

He once suggested that eurozone economic policy was incompatible with democracy.

"We all know what to do, we just don't know how to get re-elected after we've done it."

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A Truly Mind-Boggling Central Bank Balance Sheet Balloon

Takeaway:This bizarro global central banking experiment will not end well.

Earlier this year, our Macro research team highlighted that shaky investor faith in the global central banking #BeliefSystemwas breaking down. That call has been working out well. On a related note, take a couple of seconds to absorb the chart below. It highlights the astronomical, multi-trillion dollar, yen, euro rise in central bank balance sheets.

Pretty unbelievable right? Question. With trillions already on central bank balance sheets around the world... what more can they possibly do?

Not much.

We're already beginning to see the cracks in the #BeliefSystem edifice. Nowhere is this more apparent right now than in Japan. Despite the BOJ's best efforts to devalue the currency and prop up equity markets, the USDJPY is down -14.5% and Nikkei has tumbled -18% year-to-date. Meanwhile in Europe, the EuroStoxx 500 is down -12.4% and EURUSD is up +2.2%.

Why Is the #beliefSystem Breaking down?

For starters, global #GrowthSlowing continues to confound the plans of the world's omnipotent central bankers. These un-elected bureaucrats have failed to arrest economic gravity since the data started rolling over.

Slow growth evidence is everywhere. Setting aside the obvious slowdown in economic data (click here and here for more), check out sovereign bond yields for select countries. The charts below show yield curves for these sovereign bonds today (green line) versus where they were last year (yellow line). (The red line shows 0%. Notice how much closer all of these yields are to the zero bound.)

To be clear, central bankers have manipulated these yield curves using unconventional methods like negative interest rate policies and QE. But that's just the proposed inoculation for the broader disease which is global #GrowthSlowing.

Not Brexit: European Economies Just Look Terrible

Here's a look at this morning's UK data:

None of this Europe #GrowthSlowing data has anything to do with Brexit (we'll get a better understanding of the Brexit impact in coming data releases) and has everything to do with #TheCycle.

Take a look at recently reported Eurozone data:

(No acceleration to speak of)

What do you do with ugly #EuropeSlowing data? We're watching the Euro. Hedgeye CEO Keith McCullough calls the euro "the main event." In a note sent to subscribers, McCullough writes:

"EURO – with the entire edifice of consensus staring at the Pound (which has a crazy wide risk range of $1.30-1.39), the EUR/USD is looking more and more vulnerable by the day; if they can’t break it out > $1.13, $1.05 is in play on the downside – something to seriously consider within the context of more exits and #GrowthSlowing."

More to come

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